The Long Sino-American Trade War
— October 25, 2018
By A. Michael Spence
Already, the adverse impact of the two sides’ tit-for-tat tariffs – and, especially, the uncertainty that they engender – is plainly visible. For China, the psychological effects are larger than the direct trade impact. China’s stocks have dropped by some 30% since the conflict began, and further declines are expected. Because equity-backed debt has been issued to China’s highly leveraged corporate sector, the decline in stock prices has triggered collateral calls and forced asset sales, putting further downward pressure on equity values.
In order to limit a negative overshoot, Chinese policymakers have been talking up the strength of equity markets, while shoring up and expanding credit channels for the private sector, particularly for otherwise healthy and creditworthy small and medium-size enterprises, which remain disadvantaged relative to their state-owned counterparts. Whether the government will intervene directly in equity markets remains to be seen.
Read the full Project Syndicate article.
A. Michael Spence is a William R. Berkley Professor in Economics & Business.